Paul Krugman has locked himself into a fixed-rate mortgage. Why? Because he has well-founded fears about what is going to happen to interest rates in the near future.
They are going to rise, especially if President Bush gets his tax cut package through Congress.
Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don't matter. But we're looking at a fiscal crisis that will drive interest rates sky-high.
A leading economist recently summed up one reason why: "When the government reduces saving by running a budget deficit, the interest rate rises." Yes, that's from a textbook by the chief administration economist, Gregory Mankiw.
Worse, as Krugman notes, all of these numbers are exceedingly optimistic. The deficit projections are bad enough. Worse, they do not include the staggering unfunded liabilities included within the Social Security and Medicare programs. Krugman explains:
But what's really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government's solvency.
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point. "Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.
Of course, Mr. Fisher isn't allowed to draw the obvious implication: that his boss's push for big permanent tax cuts is completely crazy. But the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident — the fiscal train wreck — is already under way.
We need to prepare for the boomers' impending retirement. We need to save resources to help finance the benefits they are expecting.
That is not the Bush Administration policy. Future generations will be quite unimpressed with our lack of planning and our inescapable fiscal irresponsibility.
Especially if Krugman correctly predicts -- as I fear he does -- the likely policy solution future governments will be forced to implement.